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Searching and Learning by Trial and Error

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  • Steven Callander

Abstract

I study a dynamic model of trial-and-error search in which agents do not have complete knowledge of how choices are mapped into outcomes. Agents learn about the mapping by observing the choices of earlier agents and the outcomes that are realized. The key novelty is that the mapping is represented as the realized path of a Brownian motion. I characterize for this environment the optimal behavior each period as well as the trajectory of experimentation and learning through time. Applied to new product development, the model shares features of the data with the well-known Product Life Cycle. (JEL D81, D83, D92, L26)

Suggested Citation

  • Steven Callander, 2011. "Searching and Learning by Trial and Error," American Economic Review, American Economic Association, vol. 101(6), pages 2277-2308, October.
  • Handle: RePEc:aea:aecrev:v:101:y:2011:i:6:p:2277-2308
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    References listed on IDEAS

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    1. Thomas Piketty, 1995. "Social Mobility and Redistributive Politics," The Quarterly Journal of Economics, Oxford University Press, vol. 110(3), pages 551-584.
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    3. Mansfield, Edwin & Schwartz, Mark & Wagner, Samuel, 1981. "Imitation Costs and Patents: An Empirical Study," Economic Journal, Royal Economic Society, vol. 91(364), pages 907-918, December.
    4. Robert Gibbons, 2010. "Inside Organizations: Pricing, Politics, and Path Dependence," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 337-365, September.
    5. Jovanovic, Boyan & Nyarko, Yaw, 1996. "Learning by Doing and the Choice of Technology," Econometrica, Econometric Society, vol. 64(6), pages 1299-1310, November.
    6. Stefan H. Thomke, 1998. "Managing Experimentation in the Design of New Products," Management Science, INFORMS, vol. 44(6), pages 743-762, June.
    7. Klepper, Steven, 1996. "Entry, Exit, Growth, and Innovation over the Product Life Cycle," American Economic Review, American Economic Association, vol. 86(3), pages 562-583, June.
    8. Coscelli, Andrea & Shum, Matthew, 2004. "An empirical model of learning and patient spillovers in new drug entry," Journal of Econometrics, Elsevier, vol. 122(2), pages 213-246, October.
    9. Lee Fleming, 2001. "Recombinant Uncertainty in Technological Search," Management Science, INFORMS, vol. 47(1), pages 117-132, January.
    10. Daniel A. Levinthal, 1997. "Adaptation on Rugged Landscapes," Management Science, INFORMS, vol. 43(7), pages 934-950, July.
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    Citations

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    Cited by:

    1. João Ferreira & Nicolas Gravel, 2017. "Choice with Time," Working Papers halshs-01577260, HAL.
    2. Prato, Carlo & Wolton, Stephane, 2013. "Rational Ignorance, Elections, and Reform," MPRA Paper 68638, University Library of Munich, Germany, revised 10 Dec 2015.
    3. Umberto Garfagnini & Bruno Strulovici, 2012. "Social Learning and Innovation Cycles (revision of DP#1516, The Dynamics of Innovation)," Discussion Papers 1546, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Egger, Peter & Fahn, Matthias & Merlo, Valeria & Wamser, Georg, 2014. "On the genesis of multinational foreign affiliate networks," European Economic Review, Elsevier, vol. 65(C), pages 136-163.
    5. Baskaran, Thushyanthan, 2015. "Tax mimicking in the short- and long-run: Evidence from German reunification," Center for European, Governance and Economic Development Research Discussion Papers 230, University of Goettingen, Department of Economics.
    6. Baskaran, Thushyanthan, 2015. "Tax mimicking in the short- and the long-run: Evidence from German reunification," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113088, Verein für Socialpolitik / German Economic Association.
    7. Cripps, Martin W., 2013. "Optimal learning of a set: Or how to edit a journal if you must," Economics Letters, Elsevier, vol. 120(3), pages 384-388.
    8. Prato, Carlo & Wolton, Stephane, 2014. "The Voters' Curses: The Upsides and Downsides of Political Engagement," MPRA Paper 53482, University Library of Munich, Germany.
    9. Peiran Jiao, 2015. "The Double-Channeled Effects of Experience on Individual Investment Decisions: Experimental Evidence," Economics Series Working Papers 766, University of Oxford, Department of Economics.
    10. Babu, Suresh Chandra & Glendenning, Claire J. & Asenso-Okyere, Kwadwo & Govindarajan, Senthil Kumar, 2012. "Farmers’ information needs and search behaviors: Case study in Tamil Nadu, India," IFPRI discussion papers 1165, International Food Policy Research Institute (IFPRI).
    11. Scott E Page & John Vandermeer, 2013. "Inequality and Innovativeness," Economics Bulletin, AccessEcon, vol. 33(1), pages 1-59.
    12. Bernecker, Andreas & Boyer, Pierre C. & Gathmann, Christina, 2015. "Trial and Error? Reelection Concerns and Policy Experimentation during the U.S. Welfare Reform," IZA Discussion Papers 9113, Institute for the Study of Labor (IZA).

    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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